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New Tax Residency Tests

New Residency Rules - "Bright Line" and Factor Tests

In the 2021 Federal Budget, the Treasurer indicated that individual tax residency rules would be replaced with a "new, modernised framework".

"The primary test will be a simple ‘bright line’ test — a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Individuals who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria. The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation."

The new framework is to be based on recommendations made by the Board of Taxation in 2019 and it should be noted that in the Consultation document which preceded those recommendations referenced a number of guiding principles follows by the Board, including:

"Adhesive residency: it should be harder to cease residency than it is to establish it. Generally, once sufficient time is spent in Australia, and their connections are sufficiently embedded, then it is appropriate that this level of engagement with and benefit from Australian society must be scaled back to a large extent before residency ceases."

Consequently, apart from pursuing greater clarity, the Board specifically aimed to make it more difficult for individuals to break tax residency. From a Government perspective there is very little downside associated with this approach - with the tax net being cast wider, bringing in potentially greater revenue from individuals who often have no voting rights under current electoral rules. The Board of Taxation itself is dominated by Government and big four accounting firm representatives, and there is no "individual" taxpayer, or expatriate, representation.

Below we provide a summary of recommendations, as we understand them, but stress that except in extraordinary circumstances individuals should not seek to obtain professional advice before draft legislation is made available - there just continues to be too much uncertainty to make what are often fine judgements in relation to residency.

Summary – Likely New Residency Rules

The key features of the board of taxation report include a focus on what are referred to as a bright line ‘days count’ test to provide clarity and simplicity.

Incoming Tax Residents

For individuals who are currently non-resident for Australian tax purposes:

1. 183 day test

An individual who spends 183 days or more in Australia in an income year would be a tax resident for that income year, regardless of the person’s broader circumstances. If you haven't spent 183 days or more, move to the next test

2. 45 day test

Did you spend between 45-182 days in Australia during the financial year?

If you did not, then you are not resident for tax purposes, but if you did then proceed to the factor tests below.

3. Factor Tests

The Board indicated that the nature and composition of these factors should be determined in consultation, but the broad intention is that if you meet two of more of these factors, you are deemed as an Australian tax resident from the first day you arrive in Australia:

  • Right to reside permanently in Australia: Are you an Australian Citizen or a permanent resident?
  • Australian Accommodation: Do you have an arrangement at any time to stay in a property kept for your sole use?
  • Australian Family: Do you have a spouse and/or children under the age of 18 in Australia?
  • Australian Economic Interests: Do you have substantial Australian economic ties (such as employment or business interests)

Regardless of the precise approach adopted it should be appreciated is that, consistent with current law, an individual's tax residency might be determined, not by the Australian domestic income tax laws, but by the tie-breaker tests in a Double Tax Agreement (DTA). DTA's generally override the domestic law to the extent of any inconsistency. Hence a taxpayer in the UK, US and Singapore - countries with which Australia has a DTA - may benefit from tiebreaker tests, while for expatriates in countries such as Hong Kong or the Middle East, the day tests may be critically important.

Just note however that relying upon tiebreaker provisions, won't necessarily provide you with absolute clarity - and can give rise to more compliance costs.

Outgoing Tax Residents

Under the proposed new rules, a taxpayer only stops being an Australian tax resident if they meet one of three tests.

1. Do you meet the "overseas employment rule" - an individual taxpayer will cease Australian tax residency from the day of departure if they meet all the following factors:

  • they have been residing in Australia for the three prior income years
  • they are employed overseas with an employment period of over two years from commencement
  • they have accommodation available in the place of employment for the entire employment period
  • they will spend less than 45 days in Australia in each income year of the employment period.

2. Do you meet the ‘short-term residents’ rule - a ‘short-term resident’ is someone who has been a tax resident of Australia for less than three consecutive income years. To stop being a tax resident, a taxpayer would need to:

  • spend less than 45 days in Australia in the income year; and
  • satisfy fewer than two factors (i.e. one or none) of the ‘Factor Tests’ above.

The third proposed test applies to ‘long-term residents’. A ‘long-term resident’ is not a ‘short-term resident’. To stop being a tax resident, a long-term resident would need to spend less than 45 days in Australia in:

  • the income year; and
  • each of the two previous income years.

The effect of the last test is that residency is "adhesive", clinging to the individual who has been a long-term tax resident of Australia – consistent with the Board's objectives above but not necessarily on an equitable or fair basis.

Grandfathering

The Boards 2019 report suggested that a move to new residency rule would be subject to, "grandfathering or other transitional arrangements that will require further consideration". These are going to be potentially very important for existing expats and we will need to wait on more details.

If you would like to arrange professional advice please complete the Inquiry form below providing details and you will be contacted promptly.

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